The European Central Bank left its key interest rate unchanged Thursday amid concerns over inflation but explored the option of lowering the rate as the financial crisis increasingly affects the continent.

ECB President Jean-Claude Trichet said the bank's governing council decided unanimously to leave its refinancing rate at 4.25 per cent - but first weighed up their choices.

"We have examined two options. One, interest rates unchanged. Another one, decreasing interest rates," Trichet told reporters after the announcement. "Our unanimous conclusion is that we were right in maintaining interest rates as they are. But we examined the two options."

The Bank of England could cut borrowing costs by as much as half a percentage point next week, analysts said after further grim economic news Thursday - particularly in the housing market - stoked fears that Britain may suffer a deeper than anticipated recession.

If it were to cut its base rate from 5.00 per cent to 4.50 per cent, it would echo a similar move in October 1987 in the aftermath of the Black Monday stock market crash and represent the first half-point reduction since November 2001.

"Given the dramatic slowdowns being seen in UK manufacturing and the housing market as well as the fact that oil prices have slid back below US$100 a barrel, we would not be surprised to see the BoE cut rates at next Thursday's meeting, potentially even by 50 basis points as the Treasury did in 1987," said Simon Derrick of Bank of New York Mellon.

Latest uncertainty

Trichet did not provide solid guidance as to whether a rate cut in Europe - demanded by some politicians and labour groups - is in the offing, but acknowledged that the ongoing market crisis was weighing heavily.

But he also stressed the need to fight inflation.

"We discussed extensively the recent intensification of the financial market turmoil and its possible impact on economic activity and inflation, recognising the extraordinarily high level of uncertainty stemming from latest developments," he said.

"In this context, we stressed the crucial importance of keeping inflation expectations firmly anchored in line with our objective."

The 15-nation euro zone is fighting high inflation, low growth and dim short-term prospects for consumer and industrial demand as the global financial crisis unfolds.

Euro zone recession

Howard Archer, chief UK and European economist at Global Insight, said that "further deterioration" in euro zone manufacturing and figures showing inflation easing from 4.1 per cent in August to 3.6 per cent last month reinforce "our growing belief that the ECB could cut interest rates from 4.25 per cent to 4 per cent before the end of 2008 as the heightened financial sector turmoil and very tight credit conditions heighten the danger of euro zone recession."

In Britain, inflation in August stood at an annual 4.7 per cent, more than double the BoE's mandate to set policy to hit 2.0 per cent two years ahead.

But economists reckon September's possible increase to maybe above 5.0 per cent may well be the peak as lower oil and commodity prices feed into comparisons.

- AP

Taken from the Financial Gleaner, Friday October 3, 2008.